By William Schomberg

LONDON (Reuters) -The new British government’s plan to increase taxes on businesses contributed to the first contraction in private sector activity in over a year, a survey showed, after signs the economy was losing momentum even before last month’s budget.

The preliminary S&P Global Flash Composite Purchasing Managers’ Index, published on Friday, fell to 49.9 in November from 51.8 in October.

“The first survey on the health of the economy after the budget makes for gloomy reading,” Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said.

It is the first time the index has been below the 50.0 no-change level in 13 months.

Williamson said the survey suggested the economy was contracting at a quarterly 0.1% pace, but the hit to confidence hinted at worse to come, including further job losses.

Sterling fell to stand half a cent lower against the U.S. dollar on the day, with investors almost fully pricing in the Bank of England cutting interest rates to 4% by the end of 2025 from 4.75% now.

“For policymakers, the key question now will be to assess whether the potential inflationary hit from higher taxes offsets the potential demand hit from weaker private demand,” Sanjay Raja, Deutsche Bank’s chief UK economist, said.

Some manufacturers worried about renewed trade tensions once Donald Trump becomes the next U.S president. Others hoped clarity after the vote would unblock investment decisions.

The PMI also showed employers cut staffing levels for a second month in a row while the measure of overall new business was the weakest in a year.

A weaker outlook for the global economy weighed on companies with the automotive sector in a slump. But the first moves of Britain’s Labour government were also a cause for concern.

“Companies are giving a clear ‘thumbs down’ to the policies announced in the budget, especially the planned increase in employers’ National Insurance Contributions,” Williamson said.

WEAKENING MOMENTUM

Finance minister Rachel Reeves increased the annual burden of social security payments for employers by around 25 billion pounds ($31 billion) a year. Many businesses have said her Oct. 30 budget flies in the face of the government’s pledge to turn Britain into the fastest-growing Group of Seven economy.

Momentum was already weak with Britain’s gross domestic product edging up by only 0.1% in the three months to the end of September, according to official data last week, and retail sales fell sharply in October as shoppers worried about the budget.

Figures on Thursday showed government borrowing shot past private-sector economists’ forecasts last month, underscoring how reliant Reeves is likely to be on stronger economic growth to fund more spending on public services.

However, a measure of consumer confidence published on Friday suggested individuals turned a bit more optimistic this month after they avoided the brunt of the tax increases.

Friday’s PMI survey found firms were not replacing departing staff as they braced for April’s rise in payroll costs.

Selling prices rose at the slowest rate since the coronavirus pandemic but high rates of growth in input prices and costs related to wages were hurting the service sector.

That could worry some interest rate-setters at the Bank of England which is watching prices in the service sector closely.

($1 = 0.7987 pounds)

(Writing by William SchombergEditing by Christina Fincher)

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